Term Asset-Backed Securities Loan Facility: Frequently Asked Questions

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1 Term Asset-Backed Securities Loan Facility: Frequently Asked Questions Effective May 19, 2009 General Governance and Reporting Policy and Regulation Borrower Eligibility Investment Funds Collateral Eligibility Non-mortgage-backed ABS Eligible Receivables CMBS Credit Ratings Issuer Certifications and Auditor Assurances Master Trust Refinancing Requirements Haircuts and Rates Haircuts Average Life Interest Rates Operational Mechanics Issuer Considerations Loan Subscription and Closing Post-Closing Issues Risk Management and Compliance Primary Dealers GENERAL Why is the Federal Reserve establishing the TALF? The asset-backed securities (ABS) market has been under strain for some months. This strain accelerated in the third quarter of 2008 and the market came to a near-complete halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS rose to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of credit to consumers and businesses. Continued disruption of these markets could significantly limit the availability of credit to households and businesses of all sizes and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and business ABS at more normal interest rate spreads. How will the TALF work? Under the TALF, the New York Fed will provide non-recourse funding to any eligible borrower owning eligible collateral. On fixed days each month, borrowers will be able to request one or more three-year or, in certain cases, five-year TALF loans. Loan proceeds will be disbursed to the borrower, contingent on receipt by the New York Fed s custodian bank (custodian) of the eligible collateral, an administrative fee, and margin, if applicable. As the loan is non-recourse, if the borrower does not repay the loan, the New York Fed will enforce its rights in the collateral and sell the collateral to a special purpose vehicle (SPV) established specifically for the purpose of managing such assets. The New York Fed has published a Master Loan and Security Agreement (MLSA), which provides further details on the terms that will apply to borrowings under the TALF. The TALF Page 1 of 31

2 loan is non-recourse except for breaches of representations, warranties and covenants, as further specified in the MLSA. Over what time period will the TALF operate? The facility will cease making loans on December 31, 2009, unless the Board of Governors extends the facility. Where should questions regarding the TALF be directed? Questions should be directed to the New York Fed s Public Affairs department: or via to TALF@ny.frb.org. How may I receive updates regarding changes to TALF documents? Sign up for alerts at Governance and Reporting What is the legal basis for the TALF? The TALF is authorized under section 13(3) of the Federal Reserve Act, which permits the Federal Reserve Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships and corporations that are unable to obtain adequate credit accommodations. What is Treasury's role in the TALF? The U.S. Treasury s Troubled Asset Relief Program (TARP) will purchase $20 billion of subordinated debt in an SPV created by the New York Fed. The SPV will purchase and manage any assets received by the New York Fed in connection with any TALF loans. Residual returns from the SPV will be shared between the New York Fed and the U.S. Treasury. How will the Federal Reserve report lending under the TALF? Balance sheet items related to the TALF will be reported on the H.4.1 weekly statistical release entitled Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks. There will be an explanatory cover note on the release when items are added. In addition, the value of the collateral pledged to the New York Fed to secure TALF loans will be reported on the Federal Reserve Board s website. Policy and Regulation Is there a unique regulatory capital treatment for TALF-financed ABS held by a depository institution or bank holding company? The regulatory capital requirements for securities financed by a TALF loan are the same as those for securities that are not financed by a TALF loan. Page 2 of 31

3 What executive compensation restrictions will apply to sponsors, underwriters and borrowers under the TALF program? The goal of the TALF program is to encourage securitization of privately originated loans in important asset classes to consumers and businesses. The TALF provides support to ABS sponsors, who are providing credit to consumers and businesses, and to ABS investors, who are bringing new capital to this frozen market. The success of the program is important to halting the destructive credit cycle and to restarting credit formation. Executive compensation restrictions are targeted towards ensuring that executives of institutions that receive government support are not unjustly enriched at the taxpayers expense. Given the goals of the TALF and the desire to encourage market participants to stimulate credit formation and utilize the facility, the restrictions will not be applied to TALF sponsors, underwriters, and borrowers as a result of their participation in the TALF. How does the Employ American Workers Act (EAWA) provision related to hiring new employees who are in H-1B nonimmigrant status apply to borrowers for purposes of the TALF? The EAWA applies to all borrowers under the TALF. In addition, if the eligible borrower is an investment fund, the EAWA also applies to any entity that owns or controls 25% or more of the total equity of the investment fund. Please see the Borrower Eligibility FAQs for the definition of control. For more information on how the EAWA applies to Federal Reserve lending facilities, see Employ American Workers Act: FAQs. BORROWER ELIGIBILITY Who may borrow under the TALF? Any U.S. company that owns eligible collateral may borrow from the TALF provided the company maintains an account relationship with a primary dealer. An entity is a U.S. company if it is (1) a business entity or institution that is organized under the laws of the United States or a political subdivision or territory thereof (U.S.-organized) and conducts significant operations or activities in the United States, including any U.S.-organized subsidiary of such an entity; (2) a U.S. branch or agency of a foreign bank (other than a foreign central bank) that maintains reserves with a Federal Reserve Bank; (3) a U.S. insured depository institution; or (4) an investment fund that is U.S.-organized and managed by an investment manager that has its principal place of business in the United States. An entity that satisfies any one of the requirements above is a U.S. company regardless of whether it is controlled by, or managed by, a company that is not U.S.- organized. Notwithstanding the foregoing, a U.S. company excludes any entity, other than those described in clauses (2) and (3) above, that is controlled by a foreign government or is managed by an investment manager, other than those described in clauses (2) and (3) above, that is controlled by a foreign government. Page 3 of 31

4 What types of business entities and institutions may borrow from the TALF? Eligible business entities or institutions include entities organized as limited liability companies, partnerships, banks, corporations, and business or other non-personal trusts. Is the TALF designed to provide loans directly to businesses or consumers? No, the TALF is designed to increase credit availability for businesses and consumers by facilitating renewed issuance of ABS backed by loans to consumers and businesses at more normal interest rate spreads. The $10 million minimum loan size and requirement that all loans be secured by eligible collateral will likely make direct borrowing from the TALF infeasible for businesses and consumers. What How is the definition of controlled defined for purposes of determining the eligible borrowers definition and the applicability of the EAWA? For purposes of the eligible borrower definition, a foreign government An entity controls a company if, among other things, the foreign government entity owns, controls, or holds with power to vote 25 percent or more of a class of voting securities, or total equity of, the company. Investment Funds What types of investment funds are eligible borrowers? Investment funds that are organized in the United States and managed by an investment manager that has its principal place of business located in the United States are eligible borrowers for purposes of the TALF. However, any investment fund which is not a U.S. company in accordance with the last sentence of the first FAQ in the Borrower Eligibility section is not an eligible borrower for purposes of the TALF. Example InvestcoBermuda is a master investment fund organized in Bermuda that makes joint investments on behalf of InvestcoUS, a U.S.-organized investment fund, and InvestcoCayman, a Cayman Islands-organized investment fund. InvestcoBermuda, InvestcoUS and InvestcoCayman are all managed by an investment manager with its principal place of business in the United States. Only InvestcoUS is an eligible borrower because it is the only investment fund that is U.S.-organized. If, however, InvestcoBermuda establishes Newco, a subsidiary investment fund, in the United States and hires its U.S.-based investment manager to manage Newco, Newco would be an eligible borrower for purposes of the TALF. What is an investment fund for purposes of the TALF eligible borrower definition? An investment fund includes (1) any type of pooled investment vehicle that is organized as a business entity or institution, including a hedge fund, a private equity fund, and a mutual fund, or a vehicle that primarily or exclusively invests in eligible collateral and borrows from the TALF and (2) any type of single-investor vehicle that is organized as a business entity or institution. Page 4 of 31

5 To be considered an eligible borrower, does an investment fund need to primarily or exclusively invest in TALF eligible ABS or can it be a multi-strategy fund? An eligible investment fund includes funds that only invest in TALF eligible ABS and only borrow from the TALF, as well as funds that invest in a mix of TALF eligible ABS and other assets. Can a newly formed investment fund borrow from the TALF? Yes, so long as it satisfies all the eligible borrower requirements set forth above. COLLATERAL ELIGIBILITY What types of ABS are eligible collateral under the TALF? Eligible collateral (eligible ABS) will include U.S. dollar-denominated cash (that is, not synthetic) ABS, for which underlying credit exposures must be auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, small business loans fully guaranteed as to principal and interest by the U.S. Small Business Association, or receivables related to residential mortgage servicing advances (servicing advance receivables) or commercial mortgage loans. All or substantially all of the credit exposures underlying eligible ABS must be exposures that are both (1) originated by U.S.-organized entities or institutions or U.S. branches or agencies of foreign banks and (2) made to U.S.-domiciled obligors or with respect to real property located in the United States or one of its territories. The underlying credit exposures must not include exposures that are themselves cash ABS or synthetic ABS. Eligible ABS must be cleared through the Depository Trust Company and, except for SBA Pool Certificates or Development Company Participation Certificates, must be issued on or after January 1, Further eligibility requirements for each category of ABS are provided in the TALF Terms and Conditions and the FAQs that follow. Can a company that originates loans securitize them, acquire the AAA-rated tranche of the securitization, and finance it using the TALF? No, eligible collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower. A borrower, however, is not restricted from using an SBA Pool Certificate or Development Company Participation Certificate as collateral for its TALF loan even if the underlying loans backing the SBA ABS were originated by such borrower or its affiliates, provided that the borrower has no knowledge that the loans were originated by it or its affiliates. A borrower, in all cases, is not permitted to collateralize a TALF loan with ABS that was securitized by the borrower or by an affiliate of the borrower. Page 5 of 31

6 How is "affiliate of the borrower" defined for purposes of determining eligible collateral? An affiliate of a borrower means any company that controls, is controlled by, or is under common control with the borrower. For this purpose, a person or company controls a company if, among other things, it (1) owns, controls, or holds with power to vote 25 percent or more of a class of voting securities of the company; or (2) consolidates the company for financial reporting purposes. May investors borrow against ABS they already own? Yes, an investor may borrow against any eligible ABS. Eligible ABS must be issued on or after January 1, 2009, but need not be issued on the same day the investor borrows from the TALF. SBA Pool Certificates and Development Company Participation Certificates must have been issued on or after January 1, All other eligible ABS must be issued on or after January 1, Is there a minimum or maximum maturity limit for ABS that can collateralize TALF loans? There is no minimum maturity limit. If an ABS s maturity is shorter than the three-year or five- year maturity of the TALF loan, the TALF loan will mature upon maturity of the ABS collateral for that loan. The average life for credit card, auto, equipment, floorplan, premium finance, or servicing advance receivable loan ABS cannot be greater than five years. The average life for CMBS cannot be greater than ten years. Are zero coupon ABSs eligible as collateral for the TALF? No. Zero coupon ABS are not eligible as TALF collateral. Are privately placed ABS eligible collateral for a TALF loan, provided they meet all of the eligibility requirements? Yes. If the issuer of an ABS has an option to redeem such ABS prior to the maturity date (other than pursuant to a customary clean-up call), is the ABS eligible to secure a TALF loan? In rare cases the New York Fed may consider accepting ABS where the issuer has an option to redeem such ABS (other than pursuant to a customary clean-up call) if, in its judgment, the option does not increase risks to the New York Fed and the ABS otherwise meets the collateral eligibility criteria. No borrower may pledge ABS with a redemption option (other than pursuant to a customary clean-up call) unless, based on its review of the applicable prospectuses/offering documents, the borrower confirms that the ABS issuer has received acceptance of such redemption option from the New York Fed. For these purposes, a customary clean-up call with respect to a sponsor and its securitization refers to the clean-up call which is exercisable by the servicer or the depositor when the remaining balance of the assets or the liabilities of the issuer is not more than 10% (or a higher percentage customarily used by the sponsor in its securitizations that were offered before the TALF program was established) of the original balance of such assets or liabilities. Page 6 of 31

7 A sponsor or an issuer interested in issuing a TALF-eligible ABS with a redemption option (other than pursuant to a customary clean-up call) should contact the New York Fed via the TALF mailbox (talf@ny.frb.org, placing redemption option in the subject line) as soon as possible to get information on the New York Fed s requirements. A sponsor or an issuer must provide the New York Fed with the relevant documents, including the relevant contractual provisions that will apply to the redemption option, at least three weeks prior to the relevant subscription date. However, depending on the volume of proposals, the New York Fed may not be able to complete its review in time for the relevant subscription date. Non-Mortgage-Backed ABS What types of non-mortgage-backed ABS are eligible collateral under the TALF? Please refer to the TALF Terms and Conditions for full eligibility requirements. [This reference replaces former FAQ that copied terms and conditions verbatim.] Eligible Receivables What types of non-mortgage receivables are TALF eligible? Auto-related receivables will include retail loans and leases relating to cars, light trucks, motorcycles and other recreational vehicles; as well as commercial and government and rental fleet leases; and commercial loans secured by vehicles and the related fleet leases of such vehicles to rental car companies. Other recreational vehicles include loans and leases for all recreational vehicle types designed for consumer use that have collateralized ABS transactions in the past, such as recreational vehicles (RVs), boats, trailers and sports vehicles. Commercial, government and rental fleet ABS may include loans and/or leases related to any type of vehicle that have collateralized fleet securitizations in the past. Retail (non-fleet) leases to commercial obligors in amounts not to exceed 15% of the total pool of leases may also collateralize prime auto retail lease ABS. Eligible credit card receivables will include both consumer and corporate credit card receivables. Student loan receivables include federally guaranteed student loans (including consolidation loans) and private student loans. SBA loans include loans, debentures or pools originated under the SBA s 7(a) and 504 programs, provided they are fully guaranteed as to principal and interest by the full faith and credit of the U.S. government and meet all other TALF eligibility requirements. Eligible equipment-related receivables will include loans and leases relating to business, industrial, and farm equipment. Such equipment includes, but is not limited to, agricultural, construction, or manufacturing equipment; trucks other than light trucks; smaller ticket items such as communications, office, and medical equipment, computers, copiers and security systems; and other equipment types that have collateralized securitized receivables in the past. The credit exposures underlying an eligible equipment ABS may include a mixture of loans and leases on a mixture of types of equipment. Page 7 of 31

8 Eligible floorplan receivables will include revolving lines of credit used to finance dealers inventories of items including, but not limited to, vehicles such as cars, trucks, recreational vehicles, trailers, boats and sports vehicles; agricultural, construction, or manufacturing equipment; manufactured housing; large appliances; and electronic equipment. These revolving lines of credit may be collateralized by a mixed type of inventory, including any type of inventory that has collateralized securitized floorplan loans in the past. Auto floorplan receivables will include revolving lines of credit to finance dealer inventories of cars and light trucks. Receivables that finance medium- and heavy-duty trucks may be included in an auto floorplan receivables securitization, but only to the extent that the medium- and heavy-duty truck receivables do not exceed 5 percent of the total pool of receivables in that securitization. Eligible premium finance receivables will include loans used to finance premiums for property and casualty insurance but will not include deferred payment obligations acquired from insurance companies. The issuer of the ABS must acquire ownership of each premium finance loan in its entirety (as opposed to merely a participation or beneficial interest). The securitization must include a back-up servicer obligated to service the loans upon the resignation or termination of the initial servicer. Eligible servicing advance receivables must be related to residential mortgage loan securitizations that grant the servicer first priority in any insurance or liquidation proceeds from a loan, and, if those proceeds are insufficient, grants the servicer a first priority to general collections of the related securitization. The related servicing agreement to every trust must give the servicer the right to assign, transfer or pledge its rights to be reimbursed, and must provide that all advances are reimbursed on a "first-in first-out" basis. What terms will apply to insurance premium finance ABS and CMBS, which have been announced to be acceptable collateral starting in June 2009? Starting with the June 2009 TALF subscription, ABS backed by insurance premium finance loans will be eligible as collateral. The following terms will be incorporated into the next revision of the terms and conditions. Eligible premium finance loans will include loans used to finance premiums for property and casualty insurance but will not include deferred payment obligations acquired from insurance companies. The issuer of the ABS must acquire ownership of each premium finance loan in its entirety (as opposed to merely a participation or beneficial interest). The securitization must include a back-up servicer obligated to service the loans upon the resignation or termination of the initial servicer. The average life for premium finance ABS cannot be greater than five years. Premium finance ABS issued by a revolving (or master) trust must be issued to refinance existing premium finance ABS maturing in 2009 and must be issued in amounts no greater than the amount of the maturing ABS. Eligible premium finance ABS may also be issued out of an existing or newly established master Page 8 of 31

9 trust in which all or substantially all of the underlying exposures were originated on or after January 1, The FAQs will be more fully updated for the June 2009 subscription to reflect the addition of premium finance ABS as eligible collateral. In addition, newly issued ABS backed by commercial mortgage loans (CMBS) also will become eligible for the TALF. CMBS and non-cmbs subscriptions for TALF loans will take place in separately scheduled operations, with the first CMBS subscription taking place in late June. See TALF CMBS Terms and Conditions and TALF CMBS FAQs for more information. How does the US-domiciled obligor eligibility criteria apply to ABS secured by servicing advance receivables? All or substantially all of the advances creating the receivables must be related to a USdomiciled residential property. Are both operating and financing leases acceptable underlying receivables? Yes. Are servicing advance receivables against relating to commercial real estate eligible collateral? No. What does all or substantially all mean in the context of determining whether the credit exposures underlying an ABS are originated by U.S.-organized entities or institutions or U.S. branches or agencies of foreign banks and are made to U.S. domiciled obligors or with respect to real property located in the United States or one of its territories meet the U.S.-domiciled obligors criteria? All or substantially all in this context means For non-mortgage-backed ABS, 95 percent or more of the dollar amount of the credit exposures underlying the ABS must be exposures that are both (1) originated by U.S.-organized entities or institutions or U.S. branches or agencies of foreign banks and (2) made to U.S.-domiciled obligors or with respect to real property located in the United States or one of its territories. For the U.S. origination requirements that relate to CMBS, see the CMBS Terms and Conditions. Do U.S.-domiciled obligors in the TALF terms and conditions include those who are domiciled in a U.S. political subdivision or territory? Yes. U.S.-domiciled obligors are those domiciled in the United States, or a political subdivision or territory thereof. What does all or substantially all mean in the context of determining whether the credit exposures underlying an ABS meet the date of origination criteria? All or substantially all in this context means 85 percent or more of the dollar amount of the credit exposures underlying the ABS. Page 9 of 31

10 How are subprime versus prime defined for auto loan, auto lease, and credit card ABS? Auto loan and lease ABS are considered prime if the weighted average FICO score of the receivables is 680 or greater. Receivables without a FICO score are assigned the minimum FICO score of 300 for this calculation. Commercial receivables can be excluded from this calculation if historic cumulative net losses on these accounts have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus. In addition, the percentage of commercial receivables in a trust must not exceed 15 percent. For auto deals where a weighted average FICO score is not disclosed, the subprime haircut schedule will apply. Credit card ABS are considered prime if at least 70 percent or more of the receivables have a FICO score greater than 660. FICO scores must reflect performance data within the last 120 days. For credit card trusts where the percentage of receivables with a FICO score of greater than 660 is not disclosed, the subprime haircut schedule will apply. How will a borrower know if an ABS is considered prime or subprime? Issuers will publish in the prospectus whether the deal is prime or subprime according to TALF criteria. If this is not published in the prospectus, the deal will be considered subprime. Such representations in the prospectus are material to the New York Fed's determination of the haircuts for TALF loans and are considered a component of the representation as to the accuracy of the offering document. CMBS What types of CMBS are eligible collateral under TALF? Please refer to the TALF Terms and Conditions for eligibility requirements relating to CMBS issued on or after January 1, 2009 ( newly issued CMBS ). On what basis will the New York Fed decide whether or not to accept a newly issued CMBS or a specific loan in a newly issued CMBS pool? The New York Fed may reject a CMBS pool, or a specific loan in a CMBS pool based on factors including, but not limited to, the following: The CMBS or the individual loans do not meet the explicit requirements stated in the Terms and Conditions. While pools containing loans from a single borrower or limited to a single asset class are not ineligible per se, they will be subject to a higher level of scrutiny and to the expectation that the increased concentration of the pool will be reflected in the higher creditworthiness of the pool collateral and/or in the level of credit support. If the collateral composition or the level of credit support do not satisfy the New York Fed, the pool will be rejected. Unacceptable concentrations. CMBS that represent interests in pools that, alone or considered together with loan pools backing other TALF-financed CMBS, possess one or more concentrations (such as borrower sponsorship, property type and geographic region) considered unacceptable to the New York Fed may be rejected. Page 10 of 31

11 One or more of the loans in the pool is defaulted, delinquent in payment, or in special servicing. The New York Fed may accept the pool upon changes in the collateral composition or level of credit support. The New York Fed will utilize the services of one or more agents in connection with the review of newly issued CMBS and the loan pools that back them. Who will determine the timing of appraisals for purposes of calculating appraisal reduction amounts for CMBS collateral? CMBS pooling and servicing agreements generally require that the special servicer obtain an appraisal within a specified period following the occurrence of a servicing transfer event (that is, an event that requires a problem loan to be placed in special servicing) with respect to the related loan. Under some CMBS arrangements, other interested parties (for example, the holder of a subordinate note serviced under the pooling and servicing agreement but not held by the CMBS trust fund) were permitted to obtain competing appraisals, and there existed arbitration-like mechanisms to determine the appraised value that would be used to calculate the appraisal reduction amount. The Terms and Conditions require that newly issued CMBS arrangements not provide for such multi-appraisal arrangements. Credit Ratings Which rating agencies are considered major nationally recognized statistical rating organizations (NRSROs) are eligible rating agencies under the for purposes of TALF collateral? The major NRSROs for purposes of determining non-cmbs For ABS other than CMBS, the TALF-eligible rating agencies ABS are Fitch Ratings, Moody s Investors Service and Standard & Poor s. For CMBS, the TALF CMBS-Eligible rating agencies are DBRS, Inc., Fitch Ratings, Moody s Investors Service, Realpoint LLC, and Standard & Poor s. The Federal Reserve New York Fed will periodically review its use of NRSROs for the purpose of determining TALF-eligible ABS. What happens if an ABS that was eligible for TALF financing is downgraded by an NRSRO? Nothing happens to existing TALF loans secured by that ABS. However, the ABS may not be used as collateral for any new TALF loans until it regains its status as eligible collateral. Are ABS that are rated in the highest investment grade rating category but are on review or watch for downgrade TALF eligible? No, eligible ABS cannot be on review or watch for downgrade. Page 11 of 31

12 Are AAA credit ratings achieved using a third-party guarantee applicable for TALF eligibility? No, an eligible ABS must obtain the necessary highest investment grade ratings without the benefit of a third-party guarantee. When must the final credit rating letters for newly issued ABS be received by the New York Fed? The issuer/sponsor must submit to talfreports@ny.frb.org the final credit rating letters from each of the relevant NRSROs for newly issued ABS no later than 10 a.m. on the applicable TALF loan settlement date. For ABS backed by SBA loans, are explicit credit ratings required? U.S. dollar-denominated cash ABS backed by loans, debentures, or pools under the SBA s 7(a) and 504 programs will be eligible as long as all of the underlying credit exposures, or the ABS themselves, are fully guaranteed as to principal and interest by the full faith and credit of the U.S. government. These securities do not require an explicit credit rating. Issuer Certifications and Auditor Assurances What information must the issuer and sponsor include in the prospectus or other offering document of an ABS in order to represent that the ABS is eligible collateral for a TALF loan? In addition to information required by applicable laws, the issuer and sponsor must ensure that the information included in a prospectus or other offering document of an ABS they represent as eligible collateral under the TALF includes a signed certification indicating, among other items, that (1) the ABS is TALF eligible and (2) the sponsor (or, if the sponsor is a special purpose vehicle, the sponsor s direct or indirect ultimate parent) has executed and delivered an undertaking to the New York Fed indemnifying it from any losses it may suffer if such certifications are untrue. Such indemnity undertaking shall be delivered to the New York Fed no later than four business days prior to the TALF loan settlement date. The form of certification and indemnity for non-mortgagebacked ABS is at: Form_Certification_TALF_Eligibility.pdf. The form of certification and indemnity for newly issued CMBS will be provided shortly. With respect to SBA Pool Certificates, and Development Company Participation Certificates are not required to provide an issuer certification or no issuer certification, indemnity or offering document is required. However, pool assemblers must deliver to the New York Fed an undertaking in connection with SBA Pool Certificates which can be found at dertaking.pdf. With respect to SBA Development Company Participation Certificates, do not need to be accompanied by this or any undertaking no issuer certification, indemnity or undertaking is required. However, offering documents must be delivered for Development Company Participation Certificates. Page 12 of 31

13 What entity is the issuer that must sign the Issuer Certification? The "issuer" for purposes of the issuer certification, in both public and private offerings of TALF eligible ABS, will be the legal entity that issues the ABS. What information relating to TALF eligible SBA ABS will be available from the SBA? The SBA will post on its website the CUSIPs of all TALF-eligible SBA Pool Certificates and Development Company Participation Certificates. ml What level of assurance will be required from the sponsor s accountants that a nonmortgage-backed ABS is TALF eligible? As a condition of the disbursement of the TALF loan, an accounting firm retained by the sponsor must provide an attestation indicating that the ABS is TALF eligible. The accounting firm providing the attestation must be a nationally recognized certified public accounting firm that is registered with the Public Company Accounting Oversight Board. The form of the certification is at SBA Pool Certificates and Development Company Participation Certificates need not be accompanied by an auditor attestation. What kind of assurance will be required from the sponsor s accountants that a newly issued CMBS is TALF eligible? The New York Fed will require the sponsor of a newly issued CMBS to hire a nationally recognized certified public accounting firm that is registered with the Public Company Accounting Oversight Board to provide assurance indicating that a newly issued CMBS is TALF eligible. The form and level of assurance to be required are currently under review. Sponsors intending to participate in the June subscription can contact the New York Fed Compliance Function via at talf.compliance@ny.frb.org for additional information. Master Trust Refinancing Requirements Why are there no loan origination date restrictions for credit card ABS, floorplan ABS, premium finance ABS, and auto ABS issued by a master trust? Unlike other TALF-eligible loan categories of ABS, which are backed by a fixed pool of loans, credit card ABS, floorplan ABS, premium finance ABS, and some auto ABS are backed by dynamic pools of receivables that constantly change as customers and dealers draw on and repay their credit lines. The pools include both seasoned and recently originated receivables. Due to the quick turnover and revolving nature of the underlying pools, the refinancing of existing credit card ABS, floorplan ABS, premium finance ABS, and some auto ABS largely fund newly originated receivables, consistent with the policy goal of the TALF. Page 13 of 31

14 Does the requirement that eligible floorplan, credit card, premium finance, and auto ABS (issued by a master trust) be issued to refinance existing ABS maturing in 2009 apply at the individual master trust level or at the issuer level? The refinancing limitation applies at the issuer level rather than the individual trust level. For example, if an issuer has four master trusts with a total of $20 billion in ABS maturing in 2009, the maximum amount of TALF-eligible ABS the issuer could issue in 2009 is $20 billion; it may issue that $20 billion in ABS from one trust or from multiple trusts. How are variable funding notes (VFNs) with commitment termination dates in 2009 treated in the calculation of the amount of an issuer's credit card, floorplan, premium finance, or auto ABS (issued by a master trust) maturing in 2009? For TALF purposes, a VFN's maturity date is its commitment termination date and its amount is its maximum contractual principal balance, regardless of whether the VFN is renewed. How are VFNs that (1) had commitment termination dates prior to 2009 and (2) have controlled amortization periods in 2009 treated in the calculation of the amount of an issuer's credit card, floorplan, premium finance, or auto ABS (issued by a master trust) maturing in 2009? For VFNs in controlled amortization periods, only the amount that amortizes in 2009 counts toward the amount of an issuer's credit card, floorplan, premium finance, or auto ABS maturing in For a VFN with a commitment termination date after 2009, (1) if a collateral or other event causes the revolving period of the VFN to end in 2009, or (2) if the VFN is amended to move its commitment termination date to 2009, will the maximum contractual principal balance of the VFN be included in the calculation of the amount of credit card, floorplan, premium finance, or auto ABS (issued by a master trust) maturing in 2009? No. For non-vfn ABS with controlled amortization periods, what amount counts toward an issuer's limit? For ABS with controlled amortization periods, only the amount that amortizes in 2009 counts toward the limit. Do ABS in controlled accumulation periods with bullet maturities after 2009 count toward an issuer's limit? No. For TALF purposes, non-vfn ABS maturities are defined as dates on which principal payments are due. Must eligible ABS that refinance maturing ABS issued by a master trust be issued concurrently with the maturing ABS? No. Issuers may pre-fund their maturing ABS with eligible ABS up to three months in advance. Issuers also have the option to refinance ABS that matured in 2009 in bulk on Page 14 of 31

15 any date up to December 31, Issuers may not, however, pre-fund ABS that mature in 2010 with eligible ABS. How will the issuance limits on credit card, floorplan, premium finance, and auto ABS (issued by a master trust) be enforced? Issuers of credit card, floorplan, premium finance, and auto ABS must state in their prospectuses that the aggregate amount of eligible ABS they have issued does not exceed the amount of their 2009 ABS maturities. Issuers may issue ABS in excess of their 2009 maturities; however, these excess amounts will not be eligible collateral for TALF loans unless they are issued out of an existing or newly established master trust for floorplan, premium finance or auto ABS in which all or substantially all of the underlying exposures were originated on or after January 1, HAIRCUTS AND RATES Haircuts To what values will the haircuts be applied to determine the maximum loan amount? Under the TALF, the New York Fed will lend to each borrower an amount equal to the lesser of the par or market value of the pledged ABS minus a haircut. Alternatively, when the pledged ABS has a market value above par, the New York Fed will lend an amount equal to the market value subject to a cap of 110 percent of par value minus a haircut, and the borrower will periodically prepay a portion of the loan. The prepayments will be calculated to adjust for the expected reversion of market value toward par value as the ABS matures. 1 What is the haircut schedule for each ABS asset type? Collateral haircuts for non-mortgage-backed ABS non-cmbs collateral are as follows: Sector Subsector 0-1 >1-2 Auto Auto Auto Auto Prime retail lease Prime retail loan Subprime retail loan Motorcycle/ other recreational vehicles ABS Average Life (years) >2-3 >3-4 >4-5 10% 11% 12% 13% 14% 6% 7% 8% 9% 10% 9% 10% 11% 12% 13% 7% 8% 9% 10% 11% >5-6 >6-7 Page 15 of 31

16 Auto Commercial and government fleets 9% 10% 11% 12% 13% Auto Rental fleets 12% 13% 14% 15% 16% Credit Card Credit Card Equipment Prime 5% 5% 6% 7% 8% Subprime 6% 7% 8% 9% 10% Loans and Leases 5% 6% 7% 8% 9% Floorplan Auto 12% 13% 14% 15% 16% Floorplan Non-Auto 11% 12% 13% 14% 15% Premium Finance Servicing Advances Small Business Student Loan Student Loan Property and casualty Residential mortgages 5% 6% 7% 8% 9% 12% 13% 14% 15% 16% SBA Loans 5% 5% 5% 5% 5% 6% 6% Private 8% 9% 10% 11% 12% 13% 14% Gov t guaranteed 5% 5% 5% 5% 5% 6% 6% For ABS benefitting from a substantial government guarantee with average lives beyond five years, haircuts will increase by one percentage point for every two additional years of average life beyond five years. For all other ABS with average lives beyond five years, haircuts will increase by one percentage point for each additional year of average life beyond five years. The collateral haircut for each CMBS with an average life of five years or less will be 15%. For CMBS with average lives beyond five years, collateral haircuts will increase by one percentage point for each additional year of average life beyond five years. No CMBS may have an average life beyond ten years. Will the haircuts be the same for all borrowers for the same assets? Haircuts will vary across asset classes and securities average lives, but not across borrowers. Average Life How is average life defined for the purposes of the haircut table? Page 16 of 31

17 For ABS with bullet maturities, average life is determined by the expected principal payment date. For amortizing ABS, average life is defined as the weighted average life to maturity based on the prepayment assumptions and market conventions listed below. These prepayment assumptions will be revisited periodically. The weighted average life for newly issued CMBS is based on the assumption that each loan amortizes according to its amortization schedule, and prepays in full on the first date that prepayment is permitted without penalty. Sector Subsector Prepayment Assumption Auto Prime retail lease 75% of prepayment curve Auto Prime retail loan 1.3% ABS Auto Subprime 1.5% ABS Auto Auto Motorcycle/other recreational vehicles Commercial and government fleets 1.5% ABS 75% 100%of prepayment curve Auto Rental fleet 75% of prepayment curve Average life is length of any revolving period plus 6 months Commercial Mortgage 0% CPR Equipment Loans and leases 8% CPR Servicing Advances Small Business Small Business Student Loan Student Loan Student Loan Residential mortgages SBA 7a SBA 504 Student Loan Private Student Loan FFELP Student Loan Consolidation Average life is length of any revolving period plus 2 years 14% CPR 5% CPR 4% CPR 6 4% CPR 50% of CLR curve Page 17 of 31

18 CPR (Conditional Payment Rate) represents the proportion of the principal of a pool of loans that is assumed to be paid off prematurely in each period. ABS (Absolute Prepayment Speed) represents the percentage of the original number of loans that prepay during a given period. Where will a newly issued ABS security s average life be published? The issuer is expected to publish the security s average life in the prospectus or offering document. For amortizing assets the issuer should calculate the weighted average life to maturity based on the above prepayment assumptions and make a representation in the prospectus that the weighted average life to maturity for each AAA-rated tranche was calculated in accordance with the TALF prepayment assumptions. In addition, issuers are encouraged to base weighted average life to maturity calculations on a loan-by-loan analysis. However, if the analysis is based on representative pools, the pools must fairly and accurately model the actual collateral characteristics underlying TALF-eligible securities. Issuers should understand that such representations of weighted average life to maturity in the prospectus are material to the New York Fed's determination of the haircuts for TALF loans and the representation as to accuracy of the offering document contained in the issuer certification would be breached if the weighted average life calculations incorrectly apply the prepayment assumptions listed above or are based on assumptions that are not representative of the actual collateral characteristics underlying TALF-eligible securities. How will an existing ABS security s average life, excluding SBA ABS, be calculated? For an ABS security that is not newly issued, excluding existing SBA ABS, transferred to the New York Fed s custodian as TALF collateral on a date subsequent to the date the security was issued, the following formulas will be used: Adjusted Average Life for bullet maturities = Original Average Life [1 X ((Upcoming TALF Loan Closing Date Original Closing Date of Security)/360)] Adjusted Average Life for amortizing assets = Original Average Life [1/2 X ((Upcoming TALF Loan Closing Date Original Closing Date of Security)/360)] Except for SBA Pool Certificates, the Original Average Life is the average life reported in the final prospectus/offering document. The Original Average Life for SBA Pool Certificates is the average life reported in the undertaking. Interest Rates What spreads will be loan rates are offered on under the TALF? The loan rate is determined by the type of collateral securing the loan. Page 18 of 31

19 For TALF loans backed by collateral not benefitting from a government guarantee, In general the interest rate on floating-rate loans will be 100 basis points over 1-month. For fixed-rate three-year loans, the interest rate will be 100 basis points over the 1-year swap rate for securities with an average life less than one year, 100 basis points over the 2-year swap rate for securities with an weighted average life greater than or equal to one year and less than two years, or 100 basis points over the 3- year swap rate for securities with an weighted average life of two years or greater. For fixed-rate five-year loans, the interest rate will be the five-year swap rate plus 100 basis points. The interest rate spread on TALF loans backed by collateral benefitting from a government guarantee that is, FFELP ABS, SBA 7(a) ABS, and SBA 504 ABS will be 50 basis points. That spread is over the federal funds target rate (or the top of the federal funds target range) plus an additional 25 basis points for SBA 7(a) ABS, over one-month for FFELP ABS and over the three- or five-year swap rate for SBA 504 ABS. Interest rates will be set on the subscription date. 3 year loan Fixed 5 year loan Sector Subsector (Average Life, in years) Floating < 1 1 to < 2 2 Auto 1-year 2-year 3-year N/A 1-month + Commercial mortgage N/A N/A 3-year 5-year swap rate bps Credit Card 1-year 2-year 3-year N/A 1-month + Equipment 1-year 2-year 3-year N/A 1-month + Page 19 of 31

20 Floorplan Premium finance Servicing Advances Small Business Small Business Student Loan Student Loan Property and casualty Residential mortgages SBA loans 7(a) SBA loans year 1-year 1-year 2-year 2-year 2-year 3-year 3-year 3-year N/A N/A N/A 1-month + 1-month + 1-month + N/A N/A N/A N/A Fed Funds Target + 75 bps N/A N/A 3-year 50 bps 5-year swap rate + 50 bps N/A Private N/A N/A N/A N/A 1-month + Gov t guaranteed N/A N/A N/A N/A 1-month + 50 bps How are the interest rates on TALF loans determined? The interest rates on TALF loans are set with a view to providing borrowers an incentive to purchase newly issued eligible ABS at yield spreads higher than in more normal market conditions but lower than in the highly illiquid market conditions that have prevailed during the recent credit market turmoil. Will the interest rate spread and haircuts change from month to month? The Federal Reserve will periodically review and, if appropriate, adjust the TALF interest rate spread and haircuts for new loans, consistent with the policy objectives of the TALF. Why are the spreads on the loans backed by collateral benefitting from government guarantees lower? The lower credit risk of these ABS merits a lower risk premium on the TALF loans. What fees are associated with the TALF? Page 20 of 31

21 On each loan s settlement date, the borrower must pay to the New York Fed s settlement account an administrative fee equal to 5 basis points of the loan amount, which will cover the New York Fed s fees associated with the facility. OPERATIONAL MECHANICS How does an entity participate in the TALF program? An eligible borrower must be a customer of a primary dealer and must have executed a customer agreement authorizing the primary dealer, among other things, to execute the MLSA as agent for the borrower and to perform all actions required on their behalf. The MLSA provides further details on the requirements that apply to the entities seeking to borrow from the New York Fed under the TALF. Will there be a separate facility for each ABS asset class? No. Borrowers with eligible ABS of all asset types will receive loans from the same facility. Issuer Considerations Do issuers need to publish a final ( black ) prospectus by the subscription date, or can borrowers subscribe for a loan based on the preliminary ("red") prospectus, and deliver the final prospectus at a later date? On the subscription date, the primary dealer must provide the custodian with the CUSIP numbers and prospectuses/offering documents of all collateral expected to be pledged against the TALF loans. If the CUSIP number corresponds to a new issuance, the prospectus/offering documents submitted on subscription date may be preliminary, but the final prospectus/offering documents must be provided to the custodian no later than 12:00 p.m. (New York time) three business days prior to the applicable TALF loan settlement date. Prospectuses/offering documents are not required for SBA Pool Certificates. Should the assertions made in the Issuer and Sponsor Certification be made as of the date the ABS is priced, or can such assertions be made as of an earlier date? The assertions as to TALF eligibility of the ABS made by the issuer and sponsor shall be made as of the date of the final ("black") prospectus or offering document. In the event it is not feasible that such assertions be made as of the date of the final offering document, it is acceptable that the assertions be made as of the date of the preliminary ("red") prospectus or offering document. The opinion in the Auditor Attestation shall be made as of the same date as the issuer and sponsor make their assertions in the Issuer and Sponsor Certification. Each of the Issuer and Sponsor Certification (and accompanying Indemnity Undertaking) and the Auditor Attestation shall only be submitted to the New York Fed once per CUSIP. Will issuers be able to reserve TALF funding capacity for new issue deals that will take several months to assemble and bring to market? Page 21 of 31